7% contraction still expected according to Bank of Ireland’s Quarterly Economic Outlook

The dire international economic data evident since last autumn has given way in the past few months to figures implying a more modest pace of global contraction. Indeed, it appears that the US and UK economies may return to positive growth in the current quarter.

First quarter may mark cycle low

Recovery dependent on global upturn

“The dire international economic data evident since last autumn has given way in the past few months to figures implying a more modest pace of global contraction. Indeed, it appears that the US and UK economies may return to positive growth in the current quarter. That expectation, coupled with a pick-up in activity in a number of Asian economies, including China, has prompted forecasters to revise up projections for global growth in 2010, although most expect that any recovery is likely to be more modest than in recent cycles, given the scale of the downturn and uncertainties about the robustness of the international banking system”, according to Bank of Ireland’s Quarterly Economic Outlook published today, 9 July 2009.

“The Irish data too has generally improved, albeit signalling a slower pace of contraction rather than positive growth – the monthly Purchasing Managers Indices bottomed in February, Industrial Production rose by 5.0% in the first quarter and the growth in the Claimant Count (Live Register) has slowed. Yet, this masks a pronounced dichotomy in the performance of the different economic sectors, with domestic demand falling by 6.6% in the first quarter, against a 16% rise in net exports. The latter was underpinned by robust export growth from pharmaceuticals and medical devices, but this was not strong enough to prevent GDP falling by 1.5% in Q1. Moreover, multinational profits also rose in absolute terms and relative to the income earned on Irish assets abroad with the result that GNP fell by 4.5%”, according to Dr. Dan McLaughlin, Group Chief Economist, Bank of Ireland and author of the Outlook.

“This contraction left GDP 8.5% down on the previous year but the worst may be over in that this may prove the low of the cycle, with the contraction in GDP likely to slow to 4% by the fourth quarter, to leave the average for 2009 at -7% and -10% for GNP. This will not prevent further job losses, with the unemployment rate ending the year at around 13%. Domestic demand is likely to contract again in 2010 but exports may pick up if the global recovery emerges, offsetting further declines in consumer spending and construction to leave GDP flat. Consumer price inflation may also return to positive territory next year, following an average 3.7% fall in 2009, as the recent precipitous fall in interest rates, the main driver of the CPI trend, may be at an end. Finally, the pace of contraction in tax receipts also seems to have slowed, and the recent data suggests that the 2009 Budget deficit is likely to emerge around the revised target”, concluded Dr. Dan McLaughlin.

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